Large-cap U.S. stocks posted modest gains in the third quarter of 2014 despite ongoing turmoil in the Middle East and Ukraine and the Fed's tapering of its asset purchases. Investors were buoyed as the U.S. economy appeared to improve. Labor market data were strong, the manufacturing sector remained robust, and rising consumer spending appeared to drive growth in the service sector. Investors were further encouraged that corporations had been able to transform moderate economic growth into faster profit growth. The health care sector saw good gains and fared best within the Standard & Poor's 500 Index, followed closely by information technology shares. Energy stocks suffered steep declines as oil prices fell, and utilities also performed poorly.
The Growth & Income Fund returned 0.42% in the quarter compared with 1.13% for the S&P 500 Index and 0.29% for the Lipper Large-Cap Core Funds Index. For the 12 months ended September 30, 2014, the fund returned 17.20% versus 19.73% for the S&P 500 Index and 17.07% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 17.20%, 14.19%, and 7.63% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2013.
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Financials, information technology, and health care were the portfolio's top-performing sectors for the quarter. Consumer staples and consumer discretionary managed slim gains, while industrials and business services, materials, and energy holdings declined. Industrials are the portfolio's largest overweight versus the benchmark, with a focus on high gross margin businesses with healthy balance sheets and growth prospects that should thrive through a full market and economic cycle. Health care accounts for one of the portfolio's largest absolute positions and is the second-largest overweight versus the benchmark. Overall, the portfolio's health care holdings have performed well over the past year, and while no longer "cheap," the group still has some valuation advantages over other defensive market sectors.
Overall, we remain reasonably optimistic about the environment for equities. The U.S. economy should continue to grow modestly, supported by broadly accommodative monetary policy, solid corporate fundamentals, labor market improvements, and decent consumer spending. However, equity valuations have become full and appear stretched in some areas, making compelling investment opportunities harder to find. We are mindful of potential risks in the coming months, including mid-term elections in November, concerns about the pace and timing of interest rate hikes by the Fed, and heightened geopolitical uncertainty. We would not be surprised to see a short-term market pullback and would use it as an opportunity to add to our highest-conviction ideas at more attractive valuations.